Accounting for PCP car finance contracts
PCP finance (Personal Contract Plan) as a means to purchase a car is becoming very popular. This article sets out it should be treated for tax purposes in the Republic of Ireland.
The accounting treatment for purchasing a car through PCP is different than through a more traditional hire purchase. PCP financing is characterised by relatively low monthly installments leaving a larger residual value at the end of the contract. The residual value is only payable by the customer if they exercise the option to purchase the vehicle.
Following on from the HMRC versus Mercedes-Benz Financial Services UK Ltd ruling in UK Upper Tribunal it was determined that the such PCP arrangements were classified as the supply of goods as opposed to a lease agreement. This means that VAT is chargeable up front on the full purchase price as is the case with traditional HP structures.
Guidance from Grant Thornton highlights Irish VAT legislation which provides that the renting of goods for a certain period, including the condition that ownership shall be transferred at a date not later than the final payment. Evidence shows that ownership of the vehicle is not taken in most PCP agreements. It is more common for the customer to return the vehicle or take a replacement. As a result obtaining a car under a PCP agreement is deemed to be a supply of services as opposed to a supply of goods and should incur the lower rate of VAT.
MJH determine that cars obtained under PCP financing are not deemed as assets as it is unclear at the inception of the agreement if the car will eventually be purchased. This is more likely to be true the higher the portion of the final payment. In these instances PCP finance should be treated as an operating lease. This means payments should be charged directly to the Profit & Loss account and are deductible for cash purposes.
If the final payment is less significant the correct treatment may be to view the view the purchase as a hire purchase arrangement. Here the car would be treated as an asset on which capital allowances can be claimed.
If you would like any assistance on accounting and tax treatment of PCP arrangements then please get in touch.